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2024 Supreme(Online)(DEL) 19571
HIGH COURT OF DELHI
Yashwant Varma, Purushaindra Kumar Kaurav, JJ
RUKMANI GUPTA – Appellant
Versus
ASSISTANT COMMISSIONER OF INCOME TAX, – Respondent
ITA 84/2020
KAVITA JHA
The court clarified that loans from closely held companies to shareholders cannot be treated as dividends unless specific conditions are met, emphasizing the importance of the definition of 'shareholder' under tax law.
Headnote:(A) Income Tax Act, 1961 - Section 2(22)(e) - Interpretation of provisions regarding deemed dividend - The court analyzed the conditions under which loans or advances from closely held companies to shareholders are treated as dividends, emphasizing that such provisions aim to prevent tax avoidance by reclassifying profits as loans instead of dividends. (Paras 24-27)
(B) Legal Fiction - The court clarified that while loans can be treated as dividends under certain conditions, the definition of 'shareholder' cannot be expansively interpreted to include non-members. (Paras 25-26)
(C) Taxation of Shareholders - The court noted that the Revenue could take corrective measures to tax deemed dividends at the hands of shareholders, ensuring no income escapes taxation. (Paras 30-32)
Facts of the case:
The case involved appeals concerning the interpretation of Section 2(22)(e) of the Income Tax Act, particularly regarding loans advanced by a corporate entity to another entity in which shareholders had substantial interest.
Findings of Court:
The court found that the conditions for treating loans as deemed dividends were not met, thus ruling in favor of the assessee.
Issues: The main issues included the interpretation of 'shareholder' under Section 2(22)(e) and whether the Revenue could tax deemed dividends.
Ratio Decidendi: The court held that the legal fiction of deemed dividends does not extend to non-shareholders and emphasized the need for clarity in the definition of 'shareholder' to prevent tax avoidance.
Result: Appeals dismissed.
% 08.04.2024
1. We take note of the questions of law which had been formulated in terms of our order dated 14 December 2023. The questions themselves arise in the context of the judgment rendered by the Court in Commissioner of Income Tax v. Ankitech (P.) Ltd. [2011 SCC OnLine Del 2213] [a corporate entity in which undisputedly the two appellants before us held a substantial interest].
The Court was dealing with the issue of the interpretation liable to be accorded to Section 2(22)(e) of the Income Tax Act, 1961 [“Act”].
The issue itself arose in the context of certain credit facilities and loans advanced by one corporate entity to another.
2. The Court while dealing with the aforesaid question rendered the following pertinent observations:
- “21. We have seriously deliberated on the aforesaid arguments advanced by the counsel for the Revenue.
22. In so far as the provisions of section 2(22)(e) are concerned, we have already extracted this provision and taken note of the conditions/requisites which are to be established for making provision applicable. In CIT v. C.P. Sarathy Mudaliar (1972) 83 ITR 170 (SC), the Supreme Court had traced out the assessee of this provision in the following manner:
- "Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan.
- first limb (a) to a shareholder, being a person who is the beneficial of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent. of the voting power, second limb (b) or to my concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) third limb (c) or any payment by any such company on behalf, or for the individual benefit, or any such shareholder, to the extent to which the company in either case possesses accumulated profits."
- xxxx xxxx xxxx
24. The intention behind enacting provisions of section 2(22)(e) is that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions, such payment by the company is treated as dividend. The intention behind the provisions of section 2(22)(e) of the Act is to tax dividend in the hands of shareholders. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance.
25. Further, it is an admitted case that under the normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by a legal fiction created under section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to “dividend”. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to “shareholder”. When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here a
